A.C.T. Nachiappa Chettiar vs The Commissioner of Income Tax

Horace Owen Compton Beasley, Kt., C.J.—The petitioner is the manager of a Hindu undivided family carrying on banking business at

Alagapuri in the Ramnad District and at Minhla and Sitkwin in Burma. Up to December, 1928, he had been a partner with P.L.S.M.

Muthukaruppan Chettiar, Karaikudi, in a firm known as ''C.T.A.M., Minhla'' and in another firm known as ''C.T.A.S.M., Sitkwin'' but in

December, 1928, these two partnerships were dissolved and the petitioner and his former partner started independent concerns of their own in

both those places. A question arose as to whether the partners were successors in respect of these concerns to the businesses formerly carried on

at these places by the before-mentioned partnerships. After an appeal, the Commissioner of Income Tax, Burma, held that no succession had

taken place. In the meantime the Income Tax Officer, Karaikudi, had made an additional assessment on the petitioner u/s 34 including in his

assessment his share of the profits of the firms on the footing that a succession had taken place and he levied both Income Tax and super-tax. On

appeal to the Assistant Commissioner, in view of the decision of the Commissioner of Income Tax, Burma, the petitioner''s assessment to Income

Tax was cancelled but his assessment to super-tax was upheld. On an application u/s 33 to the Commissioner of Income Tax, Madras, for

cancellation of the assessment to super-tax, the Commissioner of Income Tax declined to cancel the assessment.

The petitioner''s claim that the assessment to super-tax must be cancelled is based upon Government of India Notification, Finance Department

(Central Revenues) No. 21, dated the 12th October, 1929, which it is contended exempts the assessee not only from liability to pay Income Tax

in respect of the profits and gains, the subject of this reference, but also super-tax thereon.

The question for our consideration is:

Whether upon the facts of this case the assessee is liable to be assessed to super-tax upon the income exempted by Government of India

Notification, Finance Department (Central Revenues) No. 21, dated the 12th October, 1929.

The Government of India Notification referred to reads as follows:

In exercise of the powers conferred by Section 60 of the Indian Income Tax Act, 1922 (XI of 1922) the Governor-General in Council is pleased

to direct that no Income Tax shall be payable by an assessee in respect of such part of the profits or gains of a firm which has discontinued its

business, profession or vocation as is proportionate to his share in the firm at the time of such discontinuance if tax has at any time been charged on

such business, profession or vocation under the Indian Income Tax Act, 1918 (VII of 1918) or if an assessment has been made on the firm in

respect of such profits or gains under Sub-section (1) of Section 25 of the Indian Income Tax Act, 1922 (XI of 1922):

Provided that such part of the profits or gains shall be included in computing the total income of the assessee.

It is contended on behalf of the assessee that the words ""income tax"" in the notification comprise Income Tax and super-tax, that Section 60

refers to ""income tax"" and that even if the Government of India intended to apply the notification only to Income Tax to the exclusion of super-tax it

would be ultra vires because Section 58 of the Indian Income Tax Act which excepts certain sections of the Act from application to the charge,

assessment, collection and recovery of super-tax does not except Section 60. It is further contended that throughout the Act the words ""income

tax"" mean both Income Tax and super-tax. With regard to the contention that by reason of Section 58 of the Act the Government of India in

issuing a notification u/s 60 have no power to exclude super-tax, in my opinion, there is no real substance in that contention. It is quite true that u/s

60 the Government of India can, by notification, deal with Income Tax and super-tax but it does not necessarily follow that the Government of

India cannot exempt reduce in rate or otherwise modify Income Tax alone or super-tax alone. What has to be considered here is what really was

intended by the notification. Taking the words ""income tax"" by themselves without any consideration of the reasons which make such a notification

necessary, I agree with the assessee''s contention that ordinarily the words "" income tax"" should be taken to include super-tax as well. But Mr.

Patanjali Sastri on behalf of the Income Tax Commissioner argues that under the Indian Income Tax Act of 1918 the basis of assessment was the

income of the year of assessment and that since of course it could not be really known until the end of the year what that income was a provisional

assessment was made and adjustment was made later when the actual in me was known and then a final assessment was made. In 1922 the basis

was altered and assessment made on the income of the previous year but by Section 68 of the Act which is now no longer in operation the old

basis of assessment was kept alive for one year. This resulted in a double assessment. When the adjustment system was abandoned on the passing

of the Act of 1922, it was agreed that one final adjustment should be made in the year 1922-23; and both a final assessment or adjustment under

the old system (retained, as before-mentioned, for one year u/s 68) and an assessment under the new system were made on the income of the year

1921-22. This resulted in the assessments which had been a year behind (so far as final assessments were concerned) being brought up abreast of

the income again. Since that is the position, it is clear that provision had to be made as regards the assessment of business, profession or vocation

on which tax was at any time charged under the provisions of the Income Tax Act of 1918 and which were or might be discontinued. These are

provided for in Section 25(3). Super-tax has always been in a different position because, ever since it was imposed in 1917-18, it has always been

assessed on the previous year''s income and so was always a year behind-hand and not abreast of income. The effect therefore of Section 25(3) is

that in the case of income tax the business, profession or vocation which is discontinued has been assessed for the number of years of its existence.

If it has been in existence for ten years, it has been assessed in respect of the income of those ten years. But with regard to super-tax, as it has

always been a year behindhand, it has only been assessed on nine years'' income. Hence it is that a distinction is drawn by the Income Tax

authorities between the two taxes and the argument addressed to us that the notification does not cover both. What then is the necessity for the

notification? Section 25(3) leaves in an unsatisfactory position an assessee who is a member of an undivided Hindu family in respect of the profits

and gains which he receives as such member of any firm which have been assessed to Income Tax as are proportionate to his share in the firm. It is

pointed out that, notwithstanding Section 25(3), Section 14(2)(b) might still render such profits and gains liable to Income Tax since Section 14(2)

(b) deals with the profits and gains of a firm which have been assessed to Income Tax and since it might have been contended by the Income Tax

authorities that as the firm is free from assessment by reason of Section 25(3) and the assessee will on that account not be able to bring himself

within the provisions of Section 14(2)(b), the notification was made necessary in order to protect such an assessee. This explanation in my opinion

is the correct one and it is clear that it is intended by the notification to put the assessee in the same position as regards exemption as that occupied

by the assessee in Section 25(3); and in my view neither an assessee in Section 25(3) nor the assessee here is entitled to claim that the notification

extends to super-tax as well as Income Tax. I am further confirmed in this opinion by the proviso to the notification which reads as follows:

Provided that such part of the profits or gains shall be included in computing the total income of the assessee.

It is conceded here by the assessee that the profits and gains are included for the purpose of arriving at the appropriate rate of Income Tax. I

cannot see why the proviso is limited merely to that purpose. I think it follows that it is also for the purpose of ascertaining whether the income is

sufficient to make it chargeable to super-tax. I would, therefore, for the reasons I have given, answer the question referred to us, in the affirmative.

The assessee must pay Rs. 250 costs of the Commissioner of Income Tax.

Cornish, J.

I agree.

Bardswell, J.

I agree.